Exit Capacity – Managing Incremental Signals 7 May 2009

Potential Incremental Signals Initialisation will pare all capacity back to baselines* But based on User responses, transitional DC bookings and OCS data, we could see up to 3123 GWh/day of above baseline capacity signalled at 82 sites in the July 09 annual application window. This broadly breaks down as follows: *Except where ARCAs have been signed

Potential increase in obligations Key issue is how we manage this increase Highest demand day = 4862 GWh Funded as part of 2007 PCR Note: we would expect obligations to be significantly higher than demand as demand is diversified, whereas the obligations include previous interruptible loads, storage and interconnectors.

National Grid’s view (1) Increases in obligations above the enduring baselines represent an increase in risk - funding for which was not provided in the last PCR. However, it would not be economic and efficient to invest for all of these incremental increases nor pragmatic to request towards 100 revenue drivers. We also do not believe that it is beneficial that baselines move further and further away from the physical reality of the system and demand.

National Grid’s view (2) Also the nature of the increases are not necessarily the same: DCs – some power stations will require specific reinforcement, others will just tighten the existing system Storage – where operation mirrors historical behaviour, we would not expect to invest for exit, but storage is becoming more price rather than demand led, so some sites could inject on high demand days DNs – generally demand is not increasing, however the location is not always where it was envisaged to be at the 2007 PCR Therefore we believe we need to use a full range of tools, including baseline setting, to address the different characteristics described above

National Grid’s Suggested Approach (1) Request specific project revenue drivers for: Tonna / Abernedd Power Station Barking Power Station Coryton 2 Power Station ……….further evaluation after July window closes Undertake a baseline “re-jig” for DN sites based on the 2008 OCS for 2011/12, before 1 July 2009. Would reduce the need for further specific revenue drivers This would be limited to each DN Baselines that were not fully utilised in 2011/12, would be reduced to accommodate incremental requests above baselines Aggregate level of baselines for each DN would be unchanged This would reduce the potential incremental increase in DN obligations by 76%

National Grid’s Suggested Approach (2) Provide non-specific funding to manage the risk associated with the remaining incremental signals (storage, DCs and DNs), in one of the following forms: National generic revenue driver for load growth Zonal revenue driver(s) National long term contracting incentive Specific long term contracting incentive Review buy back scheme As can be seen there are a number of potential options in terms of funding for capacity increases, these need further evaluation and analysis, as they are not designed to be automatically applied to incremental capacity except for pre-defined exit points. The risk associated with these increases materialises in October 2012, although the treatment of them, in order to allow contracting solutions to be developed, would need to be agreed earlier. Therefore we have suggested an agreement in principle to revisit this issue as part of the next PCR and to provide appropriate funding to manage the increased risks.

Next Steps Any immediate feedback on this approach would be welcome to National Grid NTS (Martin Watson): martin.watson@uk.ngrid.com Assuming no significant issues are raised, intention would be to complete baseline “re-jig” by 1 July 2009.